Question: . Problems and Applications Q9 Alex has a utility function U=W12U=W12, where WWis his wealth in millions of dollars and UUis the utility he obtains

. Problems and Applications Q9

Alex has a utility function U=W12U=W12, where WWis his wealth in millions of dollars and UUis the utility he obtains from that wealth. In the final stage of a game show, the host offers Alex a choice between (A) $4 million for sure, or (B) a gamble that pays $1 million with probability 0.4 and $9 million with probability 0.6.

Use the blue curve (circle points) to graph Alex's utility function at wealth levels of $0, $1 million, $4 million, $9 million, and $16 million.

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1. Identify your reference point when making a decision based on an element of risk.

3. If there are reasonable alternatives, think about your decisions based on the different reference points and see if there are any contradictions in the decisions.

4. It is only at this point that you can give the problem your full attention in relation to the various ways you have framed the problem.